AIB Group
Group Financial Control
Bankcentre
Ballsbridge
Dublin 4
Ireland
Tel: + 353 1 8740222
International Accounting Standards Board
30 Cannon Street
London
EC4M 6XH
United Kingdom
8 March 2011
Exposure Draft ED/2010/13
Hedge Accounting
Dear Sirs,
Allied Irish Banks, p.l.c. appreciates the opportunity to respond to the above Exposure
Draft.
We welcome the stated intention of the IASB to allow hedge accounting to be more
closely aligned with risk management policies and objectives.
We would highlight the difficulty in attempting to finalise a standard on Hedge
Accounting before developing a model for macro / portfolio hedging. We believe that
elements of the general Hedge Accounting proposals may need to be re-exposed
following publication of the macro / portfolio hedging proposals. We are concerned
about the operational implications of the proposals around rebalancing of hedge
relationships, and believe that rebalancing should not be mandatory. Furthermore,
voluntary de-designation is important in the operation of hedge accounting for banks
where risk is often managed on a net basis.
We support a principles-based approach to hedge accounting. Accordingly, we do not
support prohibition of hedge accounting for credit risk: we believe a workable hedge
accounting solution should be permissible, provided the risk component is separately
identifiable and reliably measurable. We would welcome an amendment to the
proposals to permit the designation of a LIBOR component in a sub-LIBOR
instrument (the 'sub-LIBOR' issue), provided it is consistent with the entity's risk
management objective. We do not agree that hedge accounting should be restricted to
risks that could affect profit or loss, and would welcome application of hedge
accounting for items that affect other comprehensive income or equity.
Allied Irish Banks, p.l.c.
page 1 of 7
Question 1
Do you agree with the proposed objective of hedge accounting? Why or why not?
If not, what changes to you recommend and why?
Answer 1
We welcome the stated intention of the IASB to allow hedge accounting to be more
closely with risk management policies and objectives. However, whilst the ED is
pitched with this objective and at a principles-based level, we believe that some of the
proposals are rules-based and not consistent with a Hedge Accounting standard which
intends to integrate with an entity's risk management objective.
Furthermore, we are concerned that existing hedge relationships may be jeopardised
by the risk management objective requirement. Under IAS 39 (IG F.6.2 (a)), it is
currently permissible to apply hedge accounting independently of the economic
purpose for the transaction, particularly where hedge accounting reflecting the
economic basis is restricted for whatever reason. We believe that the ED (notably
B53) may be interpreted to mean that an entity must discontinue hedge accounting
where the hedge relationship is not aligned to the entity's risk management objective
and would welcome clarification that this is not the case.
We agree that application of hedge accounting should not be mandatory.
We do not agree that hedge accounting should be restricted to risks that could affect
profit or loss. We would welcome application of hedge accounting for items that
affect other comprehensive income or equity.
Question 2
Do you agree that a non-derivative financial asset and a non-derivative financial
liability measured at fair value through profit or loss should be eligible hedging
instruments? Why or why not? If not, what changes do you recommend and
why?
Answer 2
We have no objection to the proposal.
Question 3
Do you agree that an aggregated exposure that is a combination of another
exposure and a derivative may be designated as a hedged item? Why or why
not? If not, what changes to you recommend and why?
Answer 3
We broadly welcome the proposals with regard to hedging aggregated exposures. We
would welcome clarification on how this is expected to work in practice, particularly
how the layered derivatives would be measured and accounted for (example B9).
Allied Irish Banks, p.l.c.
page 2 of 7
Question 4
Do you agree that an entity should be allowed to designate as a hedged item in a
hedging relationship changes in the cash flows or fair value of an item
attributable to a specific risk or risks (ie a risk component), provided that the
risk component is separately identifiable and reliably measurable? Why or why
not? If not, what changes do you recommend and why?
Answer 4
Yes, we agree.
For this reason, we believe that hedge accounting should be possible for situations in
which credit risk is hedged by credit derivatives, provided that the risk component is
separately identifiable and reliably measurable.
We would welcome an amendment to the proposals in B24 to permit the designation
of a LIBOR component in a sub-LIBOR instrument (the 'sub-LIBOR' issue), provided
it is consistent with the entity's risk management objective. We find this restriction
inconsistent with a principles-based standard concerned with alignment with an
entity's risk management objective.
Question 5
(a) Do you agree that an entity should be allowed to designate a layer of the
nominal amount of an item as the hedged item? Why or why not? If not,
what changes do you recommend and why?
(b)
Do you agree that a layer component of a contract that includes a
prepayment option should not be eligible as a hedged item in a fair value
hedge if the option’s fair value is affected by changes in the hedged risk?
Why or why not? If not, what changes do you recommend and why?
Answer 5
(a) We support the proposal to allow designation of a layer of the nominal amount of
an item as the hedged item. (b) In a principles-based standard, we do not believe it to
be appropriate to prohibit hedge accounting for a layer component of a contract that
includes a prepayment option.
Question 6
Do you agree with the hedge effectiveness requirements as a qualifying criterion
for hedge accounting? Why or why not? If not, what changes do you recommend
and why?
Answer 6
Whilst in theory we would welcome the removal of the quantitative threshold and
retrospective assessment for hedge effectiveness testing, we wonder whether the
benefits of this removal will be seen in practice. We would request more clarity on
the hedge effectiveness assessment as set out in 19(c).
Allied Irish Banks, p.l.c.
page 3 of 7
Question 7
(a) Do you agree that if the hedging relationship fails to meet the objective of
the hedge effectiveness assessment an entity should be required to
rebalance the hedging relationship, provided that the risk management
objective for a hedging relationship remains the same? Why or why not? If
not, what changes do you recommend and why?
(b)
Do you agree that if an entity expects that a designated hedging relationship
might fail to meet the objective of the hedge effectiveness assessment in the
future, it may also proactively rebalance the hedge relationship? Why or
why not? If not, what changes do you recommend and why?
Answer 7
We do not agree that there should be a mandatory requirement for rebalancing of a
hedging relationship with continuation of the relationship; we believe that any
rebalancing should be voluntary. We are concerned at how far this proposal may be
taken: we cannot envisage a situation where it would be appropriate for an entity to be
mandated to enter into external transactions purely to comply with a mandatory
rebalancing requirement under an Accounting Standard.
We are concerned about the practical implications of rebalancing. We believe that
paragraphs B29-B31 may preclude application of a 100% ratio, which, even though it
may result in some ineffectiveness, is often an easier ratio to apply in practice, given
systems and process constraints. The rebalancing outlined in B55 seems onerous to
manage at an operational level.
We support proactive rebalancing of the hedge relationship provided this is voluntary.
Question 8
(a) Do you agree that an entity should discontinue hedge accounting
prospectively only when the hedging relationship (or part of a hedging
relationship) ceases to meet the qualifying criteria (after taking into
account any rebalancing of the hedging relationship, if applicable)? Why or
why not? If not, what changes do you recommend and why?
(b)
Do you agree that an entity should not be permitted to discontinue hedge
accounting for a hedging relationship that still meets the risk management
objective and strategy on the basis of which it qualified for hedge
accounting and that continues to meet all other qualifying criteria? Why or
why not? If not, what changes do you recommend and why?
Answer 8
(a) We agree that a change in risk management strategy should trigger discontinuation
of hedge accounting, but only where it results in the hedge relationship no longer
meeting criteria. We also believe that the risk management strategy needs to be
assessed on a case by case, hedge by hedge basis.
(b) We do not agree with the proposed prohibition on voluntarily discontinuing hedge
accounting. Voluntary de-designation may be important in the operation of hedge
Allied Irish Banks, p.l.c.
page 4 of 7
accounting for banks where risk is often managed on a net basis. As noted in our
response to Question 1, we do not believe that application of hedge accounting should
be mandatory.
Question 9
(a) Do you agree that for a fair value hedge the gain or loss on the hedging
instrument and the hedged item should be recognised in other
comprehensive income with the ineffective portion of the gain or loss
transferred to profit or loss? Why or why not? If not, what changes do you
recommend and why?
(b)
Do you agree that the gain or loss on the hedged item attributable to the
hedged risk should be presented as a separate line item in the statement of
financial position? Why or why not? If not, what changes do you
recommend and why?
(c)
Do you agree that linked presentation should not be allowed for fair value
hedges? Why or why not? If you disagree, when do you think linked
presentation should be allowed and how should it be presented?
Answer 9
(a) We do not believe that the change is desirable, given that the net result will be
unchanged. (b) We do not support inclusion of a separate line item for each hedged
item / hedged risk; rather we believe the inclusion of a single line item in the
statement of financial position for all hedged items may be more appropriate.
Question 10
(a) Do you agree that for transaction related hedged items, the change in fair
value of the option’s time value accumulated in other comprehensive
income should be reclassified in accordance with the general requirements
(eg like a basis adjustment if capitalised into a non-financial asset or into
profit or loss when hedged sale affect profit or loss)? Why or why not? If
not, what changes do you recommend and why?
(b)
Do you agree that for period related hedged items, the part of the aligned
time value that relates to the current period should be transferred from
accumulated other comprehensive income to profit or loss on a rational
basis? Why or why not? If not, what changes do you recommend and why?
(c)
Do you agree that the accounting for the time value of options should only
apply to the extent that the time value relates to the hedged item (ie the
‘aligned time value’ determined using the valuation of an option that would
have critical terms that perfectly match the hedged item)? Why or why
not? If not, what changes do you recommend and why?
Answer 10
We welcome the proposals with regard to the accounting for the time value of
options, which we believe may make hedge accounting for options more accessible.
Allied Irish Banks, p.l.c.
page 5 of 7
Question 11
Do you agree with the criteria for the eligibility of groups of items as a hedged
item? Why or why not? If not, what changes do you recommend and why?
Answer 11
We believe the proposed approach will be more accessible than that in IAS 39. We
welcome the removal of the 'approximately proportional' criteria for hedging of gross
positions. However, we believe that net position hedging will still be confined to
designation of gross positions (B73). We would highlight the difficulty in attempting
to finalise a standard on general Hedge Accounting before developing a model for
macro / portfolio hedging.
Question 12
Do you agree that for a hedge of a group of items with offsetting risk positions
that affect different line items in the income statement (eg in a net position
hedge), any hedging instrument gains or losses recognised in profit or loss should
be presented in a separate line from those affected by the hedged items? Why or
why not? If not, what changes do you recommend and why?
Answer 12
We have no objection to this proposal.
Question 13
(a) Do you agree with the proposed disclosure requirements? Why or why not?
If not, what changes do you recommend and why?
(b)
What other disclosures do you believe would provide useful information
(whether in addition to or instead of the proposed disclosures) and why?
Answer 13
We support a principles-based approach to disclosures, focussed on better quality
rather than simply more disclosures. Our preliminary comment on the proposed
disclosures is that they appear to be very prescriptive and some aspects of the
disclosures may be difficult to operate in practice. The usefulness of the information
may be different, depending on the business model and risk management objective of
the entity.
Question 14
Do you agree that if it is in accordance with the entity’s fair value-based risk
management strategy derivative accounting would apply to contracts that can be
settled net in cash that were entered into and continue to be held for the purpose
of the receipt or delivery of a non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements? Why or why not? If not, what
changes do you recommend and why?
Allied Irish Banks, p.l.c.
page 6 of 7
Answer 14
We have no objection to this proposal.
Question 15
(a) Do you agree that all of the three alternative accounting treatments (other
than hedge accounting) to account for hedged of credit risk using credit
derivatives would add unnecessary complexity to accounting for financial
instruments? Why or why not?
(b)
If not, which of the three alternatives considered by the Board in
paragraphs BC226-BC246 should the Board develop further and what
changes to that alternative would you recommend and why?
Answer 15
We find largely unhelpful the 3 alternative approaches to address situations in which
credit risk is hedged by credit derivatives. We believe that a workable hedge
accounting solution should be permissible for situations in which credit risk is hedged
by credit derivatives, provided that the risk component is separately identifiable and
reliably measurable.
Question 16
Do you agree with the proposed transition requirements? Why or why not? If
not, what changes do you recommend and why?
Answer 16
We would support a later effective date, given the requirement for EU endorsement,
and given that the proposal for portfolio / macro hedging, which is such a significant
element for banks, has not yet been published. We agree that early adoption should
be permitted.
If you require clarification with regard to the above, please do not hesitate to contact
me.
Yours faithfully,
____________________
Ailbhe Whyte
Allied Irish Banks, p.l.c.
Allied Irish Banks, p.l.c.
page 7 of 7